Filing With the IRS for U.S. Citizens Living in Canada
Offshore Voluntary Disclosure Initiative
On Feb. 8, 2011, the Internal Revenue Service (IRS) announced its 2011 Offshore Voluntary Disclosure Initiative (OVDI). This initiative could affect U.S. citizens living in Canada if they have not previously filed annual tax returns with the IRS. The initiative gives taxpayers the opportunity to report not only taxable income but foreign assets held during tax years 2003 to 2010. Although voluntarily reporting does involve penalties, they are less severe than not reporting at all. There is not much time left to voluntarily report, as the closing date is August 31, 2011. Refer to the IRS 2011 OVDI Frequently Asked Questions for further details.
Foreign Account Tax Compliance Act
The OVDI precedes the enforcement of the U.S. Foreign Account Tax Compliance Act (FATCA), which was enacted during 2010. This Act requires foreign financial institutions (FFIs) to report to the IRS about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
The FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form attached to the taxpayer’s annual tax return. Reporting applies to assets held in taxable years beginning after March 18, 2010. Failure to report foreign financial assets and underpayments of tax attributable to non-disclosed foreign financial assets will result in penalties.
Reporting by Foreign Financial Institutions
The FATCA also requires the cooperation of FFIs to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS by June 30, 2013 to avoid withholdings on:
- U.S. source dividends and interest as of January 1, 2014
- All withholdable payments (including gross proceeds) as of January 1, 2015.